Risk: To Be Feared Or To Be Avoided

INSIDE THE MIND OF THE TURTLE

CURTIS M. FAITH

MC GRAW HILL, (222 PAGES)

LIFE IN THE SHELL

Be Hold the turtle. He makes progress only when he stick his neck out

-James Bryant Conant-

Look at risk not as something to be feared and avoided, but as something to be respected and understood.  We could not make progress without sticking our necks out a bit.  The way people view and manage risk can affect their ability to innovate and move forward.  People are not very good at making decision when there are identifiable correct answers or when the risk of failure is significantly high.  In fact people systematically make all sorts of errors when making decisions around uncertainly and risk.  It is important to make the right decisions under uncertainly.

 

THE SEVEN RULES FOR MANAGING RISK

i.          Life, death and uncertainly

Don’t waste life in doubts and fears;

spend yourself on the work before you,

well assured that the right performance of this hour’s duties

will be the best preparation for the hours and ages that will follow it

-Ralph Waldo Emerson-

Decisions under uncertainty are decisions without known outcomes.  Each decisions carried considerable risk.  You could make the ‘right’ decision and things might still turn out badly or you could make the ‘wrong’ decisions and things could turn out well.

In general, human beings are not very good at making those types of decisions.  We tend to consistently make the wrong decisions when facing an uncertain situation.  Our collective societal inability to deal with uncertainty in a rational manner is one of the leading causes of waste, delay and poor resource allocation.

ii.         Risk: Friend or Foe?

People fear risk because of the unknown dangers associated with it.  Sometimes people avoid risk at all costs, taking the safe route, shunning high-risk choices in favour of conservative ones.  Yet many people find that too often they are confronted with unintended personal circumstances that present the very same dangers they worked so hard to avoid.  The point is that you can’t avoid risk.  In complex systems there is no single right answer or choice. The best you can do is to make an educated guess.

Risk is defined as:

“exposure to the consequences of uncertainty”

Risk is comprised of three separate components:

·         Uncertainty (unknown or unpredictable event or environment)

·         Consequences (change in environment)

·         Exposure

RISK COMPONENTS
UNCERTAINTY	·         Drives Risk ·         In some cases, there is not enough information to make the “correct” decision ·         At other times, there are too many complicating factors to reliably predict future ·         2 different types of uncertainty:                       i.        Informational uncertainty -          Caused by lack of information -          Arises from practical constraint.                      ii.        Chaotic uncertainty -          Caused by too much complexity -          Too many variables that can combine in too many possible ways.
CONSEQUENCES	·         Are the effects of uncertainty ·         Will never be able to predict exactly what will happen in the future. ·         The best way to cope is to look at them not as bad things but as inevitabilities of reality
EXPOSURE	·         Stake in a given outcome ·         Direct consequence of uncertainty and risk

There is no way to remove all the uncertainty associated with most decisions.  Many people view risk as bad.  If you are content to learn slowly, you can evade most risk.  The risk less course is not always the best one.

iii.          Uncertainty

Uncertainty is the underlying force driving risk.  Most often, uncertainty can’t be eliminated.  Even if you do have all the time and background information in the world, it is impossible to make perfect decisions.  There will always be events you can’t predict and complication factors that you can’t anticipate.

Humans make decisions differently in the presence of chaotic uncertainty that they do in the presence of informational uncertainty.  Chaotic uncertainty is uncertainty that exists within a system over which you have little to no control.  There are simply too many different players with too many different agendas to enable any one person to reliably predict future.

Information uncertainty is entangled in its own set of complications.  Despite the fact that the right decisions is theoretically knowable with informational uncertainty, the amount of time and resources that must be expended to arrive at that right decisions is not justifiable.

In essence, uncertainty cannot be eliminated, and you are stuck making imperfect decisions.  However, you can make better decisions and quicker decisions if you understand how to deal with the possibility that your decisions might turn out to be wrong.

In circumstances where uncertainty can mean possible danger, people often revert to more primitive ways of thinking.  Embrace the reality that there is an unknown aspect to your decision making and to the outcomes of your actions. You will be better off realizing that there are no such thing as unconditionally correct answers.

Seek the truth about your situation and continually truck its status.  Keep some resources in reserve in case the original plan doesn’t work out.  Actively seek evidence that your original plan was off the mark before any indications to the contrary arise.

The truth is that most people rarely act in the same way they rationally know is best.  The most common workplace crises involve a combination of uncertainty, limited resources and the need to make decisions quickly and efficiently.

iv.             Learning From The Masters of Risk

Our main business is not to see what lies dimly at a distance

but to do what lies clearly at hand

-Thomas Carlyle-

Without risk, there would be no potential for profit.  Timing and judgement are paramount when approaching risk:

i.              Need to choose the right one

ii.             Need to time the start perfectly

The great is being distinguished from the adequate by:

i.      How well they deal with risk and uncertainty

ii.     How well they handle the difficulty of not knowing what the future will bring.

Risk is part of the landscape.  The Great Leaders knows that they;

i.              Must slog their way up the hills

ii.             Must do the hard work of losing when the inevitable gives wrong in order to be in a position to win.

Risk need to be carefully controlled on it can be lethal.  Risk is necessary but dangerous.

RULES FOR MASTERY RISK AND UNCERTAINTY
1.	Overcome fear. ·         Fear can choke our decision process and cause us to avoid taking risks ·         Fear can paralyze you when you need to act quickly and decisively ·         Fear can be both a help and a hindrance in life ·         Fear causes us to avoid danger ·         Fear disable us in 2 ways i.              Make us avoid taking risks and lost opportunity ii.             Make us put our heads in the sand and avoid facing reality of risks ·         Learn how to overcome fear
2.	Remain flexible ·         In the situation of not knowing what’s going to happen, the best strategy is to be ready for anything ·         The great i.              Diversity to increase chances of being successful ii.             Know that they may need to quickly reverse course iii.            Know there is a limit iv.           Know that they need to control their position sizes
3.	Take reasoned risks ·         More like an educated guess than a roll of the dice. ·         The great do not gambles.  Decision on risks are made in the following qualities; i.              Reasonable exposure ii.             When the ads are in your favour (positive edge)
4.	Prepare to be wrong ·         Have a plan in place ·         Determine what thing could possibly go wrong ·         Many decision in life have uncertain outcome
5.	Actively seek reality ·         Nothing is more important than the accurate picture of reality
6.	Respond Quickly to change ·         Do something when the reality is not what you wanted, when the uncertain future brings the unhoped for
7.	Focus on Decisions, Not Outcomes ·         Know that many ideas don’t work out ·         The very presence of uncertainty ensures that you’ll be wrong some of the time ·         The great have strategy ·         The focus on the reasons instead of outcomes ·         The great does not guess.

v.         Uncertain Business

In the start up environment, the three rules that are most important are

i.             Organizing for flexibility

ii.             Preparing to be wrong

iii.            Actively seeking reality

A great entrepreneur knows that being wrong is not a problem; the problem is never expecting to be wrong and staying wrong when reality comes knocking.

Applying The 7 rules for Mastering Risk For Entrepreneur
1.	Overcome fear ·         Many people dream of running their own business.  To overcome fear i.              Plan for the day to start business ii.             Talk to friends about the idea iii.            Build sales projections and marketing plans and budgets iv.           Dream of the money will make and the freedom the business will bring ·         To be successful i.              Learn to be comfortable with taking risk under certain conditions
2.	Remain Flexible ·         Be prepared to be wrong ·         Remain flexible in a start-up includes 4 important ideas: i.              A  Flexible team -          The key successful factor is to have a team of people who are psychologically well suited. ii.             A flexible plan iii.            Alternative revenue streams iv.           A strategic reserve
3.	Take Reasoned Risk ·         The most important risks in start-up i.              Market risks ii.             Capital risks iii.            Personnel Risk iv.           Technology Risk ·         Try to reduce the number of areas where you are taking riska
4.	Prepare to be wrong ·         Acknowledge that the future will not bring what you think it will ·         Have clean measurement and clean strategy for what to do when things don’t turn out as hoped
5.	Actively seek reality. ·         Do not spend too much time trying to justify their previous decisions and do little time change course ·         Sometimes reality is not so easy to find
6.	Respond quickly to change ·         It Is also important to react quickly to change in the environment ·         Speed is important
7.	Focus in Decision, Not Outcome ·         What matters is how well you make decisions with the information you have at the time, not how often you are right or wrong.

vi.           The Risk Doctors

The 7 Rules for Mastering Risk From the perspective of an ER Doctor
1.	Overcome fear ·         The time element is critical in emergency care ·         Must be able to handle life-or-death decisions everyday ·         Must have confidence in own abilities and judgement to act quickly when there’s very little time ·         Need to overcome the fear first in order to make the move ·         Fear make you second guess yourself
2.	Remain flexible ·         Prepare for maximum expected workload
3.	Take reasoned risk ·         The right diagnose can save lives yet there is no right answer, only probable answers ·         Need to be thinking on your feet and always ready to adjust to the new data as they arrive.
4.	Prepare to be wrong ·         Preliminary diagnosis may be wrong ·         While treating in initial diagnosis additional test is done to verify ·         Check for alternatives
5.	Actively seek reality ·         Continuously monitory the situation ·         Actively seeking reality is extremely important
6.	Respond  quickly to change ·         Know what to look for ·         Always look for sign the diagnosis might be wrong
7.	Focus on Decisions, Not Outcomes ·         Make the best decisions the under the circumstances using the very best information available ·         Evaluate decisions according to the relative probabilities of the outcome ·         Prescribe the best possible treatment

vii.            Fear – The Mind Killer

1.    Facing Fear

We may feel anxious from too many new sensory inputs with no prior experience to put them into context.  To face fear, we must develop the ability to perform at a basic level.  With adequate practice, the anxiety of facing fear will become less.

2.    The Psychology of fear.

There is the feeling that comes with uncertainty and risk that is triggered by threats.  This than trigger a set of primitive biochemical reactions that is often associated with uncertainty and risk that is triggered by threats. This than trigger a set of primitive biochemical reactions that is often associated with anxiety.

This debilitating fear makes it very difficult or impossible to think clearly.  Fear are anxiety are very common responses to risk and uncertainty.  No two people experience anxiety in the same way.  Anxiety represents an adaptive, flight-or-fight behaviour.  Note also that anxiety is a response to perceived threat.  In circumstances of uncertainty, anxiety comes from 2 separate sources; the very real inherent threat and the perceived threat.

3.    Refining Fear.

Fear and anxiety from uncertainty can be decompose into 3 separate sources.

i.              Novelty anxiety (comes from unfamiliar people, setting or challenges)

ii.             Irrational anxiety (comes from the emotional response and fear that go beyond a rational measure of the threat)

iii.            Inherent-threat anxiety (comes from a rational measures of the threat)

Refine your fear so that it consists only of that which is a rational response.  Try to minimize the effects of the real threat has.  The easiest type of anxiety to alleviate is novelty anxiety.  When you have become familiar and competent in the new setting, the anxiety dissipates.

A phobia is an unnatural fear response in which fear is directed toward objects or situations that do not present a danger or present a minor danger and the danger is exaggerated in the sufferer’s mind

4.    Coping with fear of uncertainty

To change a pattern, you must face that pattern in real time.  Talking about a problem does not resolve that problem.

People learn from new experience.  Changing by enacting solution is a powerful way to develop yourself as a person.  The important thing to keep in mind is that we can overcome our irrational fears with practice and guidance

5.    Overcoming the mind killer.

Fear clouds the decision making process.  When reaches a certain threshold, fear really is a mind killer.  Fear:

i.              Cause you to pay attention to your senses and depresses your ability to think rationally

ii.             Makes people avoid risks

iii.            Keeps otherwise very intelligent people from taking charge of their lives

iv.           Makes people afraid of uncertainty

We can turn our fear into joy by facing and overcoming them.  So face your fear.  Look them in the eyes.  Don’t let them control you.

viii.      Adapt Or Die

           

Water shapes it course according to the natures of the ground

over which it flows.

Water has no constant shape.

The ability to gain victory

by changing and adapting according to the opponent

is called genius.

(Sun Tzu, from the Art of War)

The single most important rule for mastering risk is to remain flexible.  You must be prepared for the future to bring something other than what you expected.  Flexibility allows for greater adaptation and responses to changing circumstance.  This can be seen in the key principles adopted by General Motors:

·         Experiment

o   It’s better to experiment with many approaches.

·         Differentiate.

o   The more uncertain the business climate, the more important it is to run diverse and differentiated experiments.

·         Adapt

o   Adapting does not require fore casting.

·         Structure Organically

·         Risking Right.

The 2 important mastering risk points are:

·         Do not over-trade

·         Do not miss any trends.

But sometimes, not risking big is the biggest risk of all.

           

Many people equate risk with danger.  For some, risk is something to be avoided whenever possible.  Remember, risk, is inherent in any human activity.  It cannot be avoided.  Risk is necessary, even vital to progress and advancement.

The trick is to understand the risk.  The third rule of mastering risks is to ‘take reasoned risks’.  Life is unpredictable and you’re always acting on imperfect information.  Risk cannot be avoided but can be managed.  The key to the third rule for mastering risk is to maintain an intentional balance between too little risk and too much risk.

In trading, to be successful, you need to understand that uncertainty can bite hard at times.  So the best thing is to think about how to keep their losses minimized.  Think Defensively.

x.         The Right Way to Be Wrong

            Preparing to be wrong is not a defeatist or pessimistic perspective.  It is to acknowledge the unpredictable nature of uncertainty.

            The forth rule for mastering risk is ‘to prepare to be wrong’.  The key element of the fourth rule are:

i.              Be wrong early to be right early.

Sometimes there is no clear answer.  Often there is in sufficient information.  Often the best way to get the right decision is to quickly make the wrong one while remaining open to the possibility that you will need to change course.

ii.             Always have a plan B.

Keep track of the paths you have taken so that you don’t revisit the routes.

iii.            The wonder of Diversity.

Don’t put all your eggs in one basket.  This is to reduce the chance that one bad event will affect the others; and it reduces the importance of the decision making process for choosing and investment.

xi.        Reality Bites

            There is nothing in the world more important than an accurate picture of reality.  The fifth rule for mastering risk, actively seek reality.

xii.       Act In Time

            Time is the most precious resources for a start-up that is trying to survive and grow.  The ironic truths in human progress is that sometimes the quickest way to find the right approach is to choose the wrong approach quickly.

            Delaying or putting off needed action can spell the difference between great success and great failure.

xiii.      When Wrong Is Right

            Many times, success is due to sheer luck or being in the right place at the right time.  It is also important to learn from the past.  If a genuinely bad decision is made, it’s good to acknowledge it.  Poor outcomes have a lesson to teach.  Main lesson to be successful:

§  Trade with an edge.

§  Manage risk

§  Be consistent

§  Keep it simple

In uncertain conditions, it is far more important to pay attention to actual current happening than the prediction.  A path that seemed at first to be wrong is right if reality unfolds differently than expected.

 

INSIDE THE MIND OD THE TURTLES

PART TWO

PRACTICAL IMPLICATION OF THE SEVEN RULES

To learn, you need to make mistake.  You need to do the wrong things at times.  You need to be willing to fail.  As individuals, we often don’t handle uncertainty and risk very well.  As group, we mostly fail utterly.  There can be no effective management of uncertainty without a firm grasp of reality.

Rules and procedures are often implemented in an attempt to compensate for a lack of trust between upper and lower-level management.  Rigid rules and procedures are also used to compensate for lack of clear leadership.  They replace trust with control and approval process; clarity of direction with specifications and formal procedures.

When the world is moving fast and change accelerates, not making decision or making the traditional conservatives ones in no longer a safe option.  Many people let others make their decisions because they are afraid of making the ‘wrong’ decisions.

In these times of great uncertainty we need to become more adaptable and flexible.  We need to behave humbly and face the reality of our current circumstance.